The Court’s Ruling in Hedayati v. Interinsurance Exchange of the Automobile Club Serves as a Stark Reminder to Insurers and their Counsel to Promptly Review and Communicate All Policy Limits, Settlement Demands, and to Seek Summary Adjudication, in Addition to Summary Judgment, where Plaintiffs Identify Numerous Theories of Liability

The Court of Appeal has certified for publication its opinion in Hedayati v. Interinsurance Exchange of the Automobile Club reversing summary judgment granted in favor of an insurer in a $26 million bad faith claim leveled against it by the plaintiff as assignee of the insured’s bad faith claims. (Hedayati v. Interinsurance Exchange of the Automobile Club (2021) 67 Cal.App.5th 833, reh’g denied (Sept. 8, 2021), review filed (Sept. 17, 2021)[1].)

This case reconfirms an insurer’s burden of proof on summary judgement in a bad faith case, and in so doing, provides a warning and three important reminders to insurers and their counsel. First, the plaintiff made a policy limits demand where the insurer knew liability exposure in excess of the policy limit was all but certain, and this case confirms that failing to promptly settle such a matter within policy limits potentially exposes the insurer to a bad faith claim. Second, the appellate court found summary judgment to be inappropriate where the moving party does not refute each and every theory of liability set forth in the plaintiff’s complaint. Third, the court noted that issues of reasonableness are, fundamentally, questions of fact.

On October 1, 2012, the insured ran a red light, striking plaintiff Hedayati in a pedestrian crosswalk. Ms. Hedayati, who was taking a break from studying for her medical board examinations at the time of the incident, lost one leg, shattered the other, and was in a coma with numerous broken bones as a result of the accident.

The insured reported the incident to his insurer, Interinsurance, the day after the incident, and Interinsurance interviewed him that same day. The insured admitted to having no other insurance, no job, less than $200,000 in assets, and that he was living with his parents at the time of the incident. He also gave express authority to release the policy limits so that Interinsurance could promptly resolve the claim. During this meeting, the insured also confessed to having run a red light, and the adjuster explained to him that there would likely be liability exposure in excess of policy limits ($25,000.00) based upon his speed and striking a pedestrian, even if only partial liability were ultimately attributed to him. An Interinsurance manager reviewing the claim afterward agreed, noting he also believed this to be an excess policy limits claim.

A couple weeks later, the plaintiff’s attorney repeatedly reached out to Interinsurance by phone and fax, seeking information about the insured’s policy limits. Despite having the insured’s authorization, Interinsurance did not disclose the information at that time, but contended that it did disclose thereafter; however, this was an issue in dispute in Interinsurance’s subsequent summary judgment motion.

On October 31, 2012, Interinsurance’s adjuster sent plaintiff a letter confirming a prior settlement offer that the plaintiff asserted was never actually made. This settlement letter offered the policy limits of $25,000.00, but failed to provide the policy information, the policy itself, or the fact that the insured had no assets. On November 20, 2012, plaintiff’s counsel responded with a letter offering to settle the matter for the $25,000.00 policy limits, set to expire seven days later on November 27, 2012. However, acceptance of this settlement offer was expressly conditioned upon Interinsurance producing the documentation omitted from its October 31st letter, i.e., policy documents and the insured’s signed declaration regarding assets and insurance. Interinsurance did not communicate this offer to its insured and did not respond until the day after the settlement offer expired–depriving the insured of the opportunity to accept the policy limits demand. Plaintiff subsequently obtained a $26 million judgment against the insured, and obtained the assignment of the insured’s bad faith claim against Interinsurance.

In the bad faith case that followed, Interinsurance filed a motion for summary judgment on plaintiff Hedayati’s bad faith claim asserting that there could be no bad faith, as there was no unreasonable refusal to settle because plaintiff’s settlement demand was not reasonable. The trial  court agreed, and entered summary judgment in Interinsurance’s favor.

On appeal, the Fourth Appellate District reversed the grant of summary judgment because the issues turned on whether the plaintiff or defendant’s conduct was reasonable and such issues are “fundamentally” questions of fact reserved for the trier of fact’s determination.

The appellate court also held that summary judgment was not proper because plaintiff had pled several theories of bad faith, and even if Interinsurance successfully defeated some of the plaintiff’s claims, it had not succeeded in dispensing with every theory of liability set forth in the plaintiff’s complaint, as required for summary judgment.  Summary judgment as to the entire action was not appropriate, but Interinsurance had failed to alternatively seek summary adjudication of each claim in the complaint, so the appellate court was left with no other option than to reverse the grant of summary judgment and remand the matter to the trial court.

Walsworth continues to monitor this matter for updates from the California Supreme Court on Interinsurance Exchange of the Automobile Club’s appeal, along with its and, as amicus curiae, American Property Casualty Insurance Association’s separate requests for depublication. However, until the state’s Supreme Court rules on these requests, this matter remains good law and this case highlights the importance of insurers and their counsel dotting their i’s and crossing their t’s. Had the insurer followed its own excess exposure policies and procedures, the plaintiff’s $25,000 demand would have been communicated to the insured and may have been timely accepted. Moreover, had the insurer and/or its counsel sought summary adjudication of each claim alleged in the complaint in addition to summary judgment, perhaps the insurer may have secured a dismissal of at least some of the plaintiff’s claims on appeal. The Hedayati matter serves as a cautionary tale to remind us all to remain vigilant and diligent when handling potentially high exposure claims.

Partner Helen Luetto and Senior Associate Marlene Flores have significant experience in defending insurance bad faith cases, involving both first-party and third-party claims. If you have any questions or would like additional information, She also has significant experience in defending insurance bad faith cases, involving both first-party and third-party claims. Please contact Helen, hluetto@walsworthlaw.com or Marlene, mflores@walsworthlaw.com by email or at (714) 634-2522.

[1] Though the opinion is currently certified for publication, Interinsurance’s petition for review and request for depublication are both pending before the California Supreme Court as of October 26, 2021, in Hedayati v. Interinsurance Exchange of the Automobile Club (Sept. 17, 2021, S270909).